Income Tax | Foreign Companies' Head Office Expenses For Indian Business Subject To Deduction Limit Under S. 44C : Supreme Court

In a set-back to foreign companies doing business operations in India, the Supreme Court on Monday (December 15) held that all head office expenditure incurred by them outside India, whether common or exclusively for their Indian business operations, must be subjected to the statutory ceiling prescribed under Section 44C of the Income Tax Act, 1961, thereby ruling out any claim for full deduction.

A Bench comprising Justice JB Pardiwala and Justice KV Viswanathan allowed the Revenue's appeal and set aside the Bombay High Court's judgment, which had upheld the grant of full deduction for “head office expenditure” incurred by the respondent non-resident assessees outside India in relation to their business operations in India.

The Respondents-non resident banks operating in India through branches, had claimed deductions under Section 37(1) for expenses incurred by their foreign head offices. These included travel, certification, and administrative costs stated to be exclusively incurred for Indian branch operations. The Assessing Officers applied the Section 44C cap, limiting deductions to the lower of 5% of adjusted total income or the amount attributable to Indian business.

While the appellate authorities and the Bombay High Court ruled in favour of the assessee, the Revenue challenged the decision before the Supreme Court.

Section 44C of the Income Tax Act, 1961 limits the amount of head office expenses that a non-resident can claim as a deduction in computing taxable income from business or profession carried on in India. The provision applies specifically to non-resident assessees having business operations in India and caps the deduction in respect of head office expenditure incurred outside India, attributable to their business operated in India.

Under this section, the allowable deduction is restricted to the lower of 5% of the adjusted total income or the actual amount of head office expenditure attributable to the Indian business. The underlying objective of Section 44C is to prevent non-resident entities from making excessive or inflated claims of foreign head office expenses so as to reduce their taxable income in India.

As per Explanation (iv) to Section 44C, the Head Office expenditure means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of

(a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession;

(b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing the affairs of, any office outside India;

(c) travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and

(d) such other matters connected with executive and general administration as may be prescribed.

Before the Supreme Court, the respondent assessees had contended that they were entitled to a full deduction on the ground that Section 44C was inapplicable, asserting that the expenditure incurred outside India towards head office expenses attributable to the Indian business or profession under sub-clause (c) of Section 44C constituted common expenditure, rather than expenditure exclusively incurred for the Indian branches.

The key issue was whether expenditure incurred by a foreign head office exclusively for Indian branches falls outside Section 44C and can be fully deducted under Section 37(1), or whether it must be capped under Section 44C.

Rejecting the Respondents argument, the judgment authored by Justice Pardiwala said “irrespective of whether the expenditure was 'common' or 'exclusive', the moment it is incurred by a non-resident assessee outside India and falls within the specific nature described in the Explanation, then Section 44C would come into play and become applicable.”

The Court accepted the Appellant's-revenue argument which argued that “once an expense qualifies as 'head office expenditure' under the Explanation, it must be processed strictly under Section 44C. Otherwise, the section would be rendered meaningless. In the present appeals, the expenditure claimed by the respondents, incurred by the head offices located outside India, squarely falls within the said definition, being executive and general administrative expenditure incurred outside India.”

In essence, the Court held that once a non-resident foreign bank incurs expenditure outside India towards “head office expenditure” for its operations in India, Section 44C is automatically attracted. Consequently, the permissible deduction stands restricted to the lower of (i) 5% of the adjusted total income, or (ii) the amount of head office expenditure specifically attributable to the assessee's business or profession in India.

A conspectus of legal discussion regarding Section 44C of the Act, 1961, is as under:

“a) Section 44C is a special provision that exclusively governs the quantum of allowable deduction for any expenditure incurred by a non-resident assessee that qualifies as 'head office expenditure'.

b) For an expenditure to be brought within the ambit of Section 44C, two broad conditions must be satisfied: (i) The assessee claiming the deduction must be a non-resident; and (ii) The expenditure in question must strictly fall within the definition of 'head office expenditure' as provided in the Explanation to the Section.

c) The Explanation prescribes a tripartite test to determine if an expense qualifies as 'head office expenditure' - (i) The expenditure was incurred outside India; (ii) The expenditure is in the nature of 'executive and general administration' expenses; and (iii) The said executive and general administration expenditure is of the specific kind enumerated in clauses (a), (b), or (c) respectively of the Explanation, or is of the kind prescribed under clause (d).

d) Once the conditions in (b) referred to above are met, the operative part of Section 44C gets triggered. Consequently, the allowable deduction is restricted to the least of the following two amounts: (i) an amount equal to 5% of the adjusted total income; or (ii) the amount of head office expenditure specifically attributable to the business or profession of the assessee in India.”

Accordingly, the appeals were allowed.

Cause Title: DIRECTOR OF INCOME TAX (IT)-I, MUMBAI. VERSUS M/S. AMERICAN EXPRESS BANK LTD. (and connected case)

Citation : 2025 LiveLaw (SC) 1206

Click here to download judgment

Appearance:

For Appellant(s) : Mr. Raghavendra P Shankar, A.S.G. Ms. Madhulika Upadhyay, AOR Mr. Karan Lahiri, Adv. Mr. Navanjay Mahapatra, Adv. Mr. Sarthak Karol, Adv. Mr. V C Bharathi, Adv. Ms. Priyanka Terdal, Adv.

For Respondent(s) :Mr. Aniruddha A Joshi, Sr. Adv. Mr. Rajeev Kumar Panday, Adv. Mr. Rajeev Maheshwaranand Roy, AOR Mr. P Srinivasan, Adv. Mr. Percy Pardiwala, Sr. Adv. Mr. Hitesh Chande, Adv. Mr. Kishore Kunal, AOR Mr. Aditya Rathore, Adv. Mr. Nishant Thakkar, Adv. Mr. Nikhil Rajan, Adv.